Lets face it, trading futures is challenging. Both experienced participants and novices need all the knowledge possible to succeed. One of the more important aspects of trading futures or any financial instruments is to know with whom you are dealing. Trying to get all the information needed can be overwhelming to a new trader and almost as harrowing to an experienced trader. There is one extremely helpful place to start — the National Futures Association (NFA).The NFA is the self-regulatory organization for the U.S. derivatives industry. Membership in NFA is mandatory for everyone conducting business with the public in on-exchange traded futures, retail off-exchange foreign currency and OTC derivatives (swaps). The NFA has been around for more than 30 years. What does the NFA offer to a prospective trader who is seeking information on a firm with which to trade? The NFA’s website has a search program through which an inquirer can look up anyone who is registered. The program is The Background Affiliation Status Information Center (BASIC.) The NFA calls it a web-based system that allows individuals to check the registration status and disciplinary history of every firm and individual registered to conduct futures trading business with the investing public. It also allows the review of selected FCM financial information. The search mechanism will show whether the firm or person in question has any complaints, what they were and how they were resolved. It will show what who an individual worked for at the time.
One analyst had a recent inquiry from a client who was considering opening an account with a party. The client wanted to know what the analyst knew about the firm. The analyst went to the NFA website search facility and found one of the people involved in the company had felony listings. That may have saved the prospective trader/investor a lot of headaches, if not money as well. In using the NFA’s search tools, however, one has to be cautious and thorough. Most Futures Commission Merchants (FCMs) deal with thousands and thousands of customers, so they are going to have complaints. Just because there is a complaint doesn’t mean there is a problem. One has to continue clicking through to find out how the complaint was resolved. Did the person who filed the complaint win, or was the firm accused exonerated? That will all be in the record and it is imperative to researching this resource until you find the outcome.
If the person listed has had problems with the Commodity Futures Trading Commission (CFTC), the NFA item will make a notation of it. One can’t get the CFTC document, however, from the NFA site to see what it is about. The notation, however, does alert one to go to the CFTC and look at their enforcement actions press releases. Many traders, FCMs and others affiliated with the futures industry say the NFA has made a real difference, despite a couple of high profile mishaps in recent years with MF Global and Peregrine Financial Group (PFG). One analyst said that “10 years ago there were a lot more unsavory characters in the industry” and the NFA has helped to screen out such operators. Not only can one find results of complaints on NFA’s BASIC program, there is also a box for filing complaints.
The NFA also has been working in the past three years with the CFTC, the CME Group and other self-regulatory organizations (SROs) to develop new reporting rules to further protect customer funds. Customer funds are at risk in incidents such as MF Global and PFG. You can now have access to more frequent reporting requirements the NFA imposes on its member FCMs. We will follow in coming weeks about even further disclosure requirements for FCMs.